date | theme

10. February 2021 | Property swing – transferring assets to spouses without gift tax

04. May 2021 | Empowerment needs test and save inheritance tax

15. December 2021 | Avoid gift tax when gifting large assets

29. December 2021 | Optimize donation: Transfer financial assets tax-free to spouses

19. January 2022 | lower gift tax through usufruct on capital gains (this contribution)

If you have larger financial assets that you want to transfer to your own children in the context of succession, then you can optimize the gift tax through usufruct. For this purpose, a GmbH & Co. KG is founded and the capital is invested in low-interest securities. The capital gains should then be paid by usufruct to his own child. The gift tax triggered by this is only low because of the low interest rate. At the same time, however, the net present value of the assets employed also decreases. However, if one later switches to investments that allow a higher interest rate, this has no retroactive effect on the gift tax previously paid. Therefore, you can later transfer the shares in the GmbH & Co. KG to your own child, whereby the capital value of the shares is only low due to the meanwhile higher interest rates, which only the usufruct absorbs. Accordingly, the tax for the gift of the shares in GmbH & Co. KG to the own child is low.

Many successful entrepreneurs have created a private fortune that they will one day bequeath to their children. But the inheritance or gift tax involved is a circumstance that they would like to avoid for the benefit of their child. There are many different methods that can be helpful in achieving this goal. One of these is the optimisation of the gift tax by means of the usufruct of capital gains which are to be paid to one's own child. In this article, we now present the design model in detail. Let us give a clear example of this.

In our example, the successful entrepreneur Sophia Weise is said to have created a fortune of EUR 5 million by investing in Bitcoins early on. On the one hand, you would now like to continue to invest this asset profitably. On the other hand, she also worries because her underage son Valentin, who is to take over her assets one day, would have to pay a considerable amount of taxes on the transfer of the assets. It feels it is unfair that the property already taxed should be subject to taxation again in the case of a gift or inheritance. This is why Sophia Weise seeks out us as her tax advisor to talk about the best possible way of transferring wealth.

What is our proposal? First of all, we want to use usufruct as a design tool for optimizing the gift tax. To be more precise, it is a question of beneficiary status. In addition, our approach is two-fold. In the first step, we regulate the grant usufruct to the son of Mrs. Weise. This is already taxable as a gift, albeit to a relatively small extent. And in a second step, Valentin Weise is to receive the tax-optimized financial assets as a gift from his mother. But in turn.

As the first measure, Ms. Weise founds a GmbH & Co. KG. As a limited partner, she is of course also 100% involved in it as well as in the Complementary GmbH. For the establishment, she uses her assets of EUR 5 million, which she brings to the company. With this capital, GmbH & Co. KG now invests in low-interest securities. This is not a major challenge given the low interest rates currently prevailing in financial markets. So let’s assume that Sophia Weise can expect an annual return of only 0.5% for this investment.

Subsequently, she transfers the participation rights in the capital gains of her GmbH & Co. KG to her son. Of course, this benefit constitutes a taxable event, so that it informs the tax office in due time. The tax office now calculates the net present value which the usufruct of the capital income therefore means for the determination of the gift tax. This is based on a factor of 15. So you calculate :

EUR 5,000,000 x 0.5% x 15 = EUR 375,000

Therefore, the present value as a basis of assessment for the gift tax amounts to EUR 375,000. Valentin Weise can deduct an allowance of EUR 400,000 from this, so that at this point the gift tax on the usufruct remains tax-free. If the invested assets were well above EUR 5.000.000, for example twice the amount, then of course a certain gift tax on the usufruct would be incurred, albeit only to a comparatively small extent.

What we have to take into account here is that by calculating the NPV of the grant usufruct, the NPV of the participation in GmbH & Co. KG is also subject to a change. If a profit flows from the grant usufruct, then the own capital value of the company shares falls to the same extent. Thus, the value of GmbH & Co. KG at this time is only EUR 4.625.000.

But what is the use of usufruct as a means of design, if so far neither the actual gift of the property takes place nor a gift tax is incurred? To explain this, we need to go a little further.

3.2.1 Change in the rate of interest

As we know, Ms. Weise has only invested in low-interest investment properties. After some time, however, she changes the investment strategy of her GmbH & Co. KG. It should now be able to expect an interest rate of 5 %. Perhaps this is also accompanied by a future change in interest rate policy. In any case, the capital value of usufruct has now also increased tenfold. Instead of the original and already taxed value of the usufruct of EUR 375,000, it is now EUR 3,750,000. However, the increase in the NPV here remains irrelevant for the gift tax previously paid, because the original taxation has a valid effect.

3.2.2. Transfer of shares in GmbH & Co. KG

Now Mrs. Weise moves on to the next step, which actually serves the purpose of her project. She gives her son her company shares, so Valentin is the sole owner of all shares. Now this process also triggers taxation. However, when calculating the gift tax, the tax office must take into account both the net present value of the shareholdings and the usufruct of the capital gains. However, one assumes the current capital value of the usufruct instead of the one in which Valentin Weise had previously had to pay gift tax (if he could not have used an allowance). In other words, the tax office calculates the net present value of the shares in the following way:

EUR 5.000.000 x 5 % x 15 = EUR 3.750.000 current net present value of usufruct

EUR 5.000.000 – EUR 3.750.000 = EUR 1.250.000 NPV of the shares in GmbH & Co. KG

This amount of EUR 1.250.000 is now subject to a gift tax. If you assume that Valentin has now become at least ten years older, then he can set for this gift again a free amount of EUR 400,000. As a result, EUR 850,000 remained taxable. This is thus significantly less than if his mother had transferred to him the financial assets of originally EUR 5.000.000 right at the beginning in total. Because then the gift tax without our design would be incurred by usufruct deducting the deductible allowance to an amount of EUR 4.600.000.

Of course, in this example, the gift tax could be further optimized by the usufruct. This would require the donation of the company’s shares to be distributed over a further ten-year period. In this way, Valentin Weise would pay no gift tax at the latest 30 years later. After only 20 years, the gift tax would be only EUR 50,000, which would amount to a gift tax of just EUR 3,500 at a tax rate of 7 % applicable in his case.

In order to justify the present design of the gift tax through the usufruct of the capital income in a legally sound manner, we have to look at two tax laws. On the one hand, this is the inheritance and gift tax law. On the other hand, this also requires a look into the evaluation law.

Here we find both the general rules according to which the gift of company shares is made and those that determine usufruct as the trigger of the gift tax. Here we find the legal basis for the taxation of usufruct in § 7 paragraph 1 number 1 ErbStG. It is true that there is no explicit reference to the taxation of usufruct. Nevertheless, this results from the general wording. For the generous, enriching donation of usufruct to a beneficiary person at the expense of the donor person is clearly given in our example. This also applies to the donation of shares in GmbH & Co. KG.

Furthermore, we must appreciate the distinction made by the Inheritance and Gift Tax Act with regard to the date of transfer of a property. In our example, the transmission always takes place among living people, so that we have to deal with a donation according to § 7 ErbStG. And this is taxable according to § 1 (1) no. 2 ErbStG.

In addition, the taxation of the grant beneficiary takes place at the time when the transfer of the participation rights to the recipient takes place. This is important because it precludes subsequent taxation if interest rates increase.

Then a word about the allowance, which is applicable when the gift tax is incurred, both for usufruct and for the transfer of company shares. Here § 16 (1) no. 2 ErbStG forms the legal basis for this tax relief. The amount of the allowance depends on the degree of relatives.

Finally, the note governing the valuation of the transferred assets in the sense of the inheritance and gift tax. This is in § 12 ErbStG.

Who now follows the latter instruction, should look up in §§ 13 to 16 BewG in order to find the legal bases for the assessment of the capital value of the grant usufruct and the company shares. It contains all the details, which we applied a little simplistic in our example.